CATastrophe: Why Caterpillar, Inc. is a Strong Sell

A few friends and I have been bearish Caterpillar, Inc. since at least Q1 of this year. The full report in the embedded document below includes information and opinions provided by said friends of LST. We believe:

  • Questionable revenue recognition practices between CAT & its foreign subsidiaries seem ripe for malfeasance.
  • 54% of CAT’s assets belong to Caterpillar Finance, yet management rarely mentions its existence. Shareholders seem unaware of its existence (just as many of GE’s shareholders were unaware of GE Capital before 2008)
  • CAT’s customers are slashing spending & are in cash conservation mode. Some are at risk of filing chapter 11. 70% of sales originate from outside the United States.  Take FCX for example which just announced it is reducing, deferring capital expenditures, and seeks asset sales.
  • CAT does not generate enough free cash flow to cover its dividend.
  • CAT completed $9 billion in failed (including one fraudulent), value-destroying acquisitions since 2010.
  • Channel checks from 4 sources show backlog worse than the lower end of expectations.
  • Compensation targets mis-aligned and far beneath management’s guidance and stated goals.
  • CAT shares are worth no more than $28.00/share (67.4% downside) & face further downside risk depending on how China & the commodity bust play out.
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